Thomas Friedman Shifts the PPF in his latest column---I provide the Graphs!!

The problem confronting the economy is how to create jobs and increase future opportunities for students in school today.  First, we need to work to put people to work within the under-utilized production capacity the US economy currently has.  Right now we have lots of unemployed and under-employed resources (people, equipment, office buildings, factories, and other infrastructure) that are not at their optimal productive capacities.  Friedman is looking past this and into the future---how are we going to INCREASE our productive capacity to absorb all the new entrants (YOU!!) into the economy when you are prepared, after your education, to enter it. 

"What the country needs most now is not more government stimulus, but more stimulation. We need to get millions of American kids, not just the geniuses, excited about innovation and entrepreneurship again. We need to make 2010 what Obama should have made 2009: the year of innovation, the year of making our pie bigger, the year of “Start-Up America.”..."Obama should bring together the country’s leading innovators and ask them: “What legislation, what tax incentives, do we need right now to replicate you all a million times over” — and make that his No. 1 priority. Inspiring, reviving and empowering Start-up America is his moon shot..."

To illustrate, we use the Production Possiblities Frontier.  This model represents the productive capacity of an economy IF it is fully-employing all of its productive resouces--land, labor, capital, entrepreneurship in the LEAST costly way.  In other words, how much can we produce as efficiently as possible given our societal resources. Refer to the graph below:

An economy can produce two broad categories of goods---(1) Capital Goods, which are goods designed to add to productivity, such as education, skilled labor, machinery, computers, factories, etc.  Essentially the things we invest in today so that it enhances our ability produce in the future.  The amount of Capital an economy has is part of its "CAPITAL STOCK"--or Stock of Capital to produce goods.  The quality and quantity of Capital Stock is VITAL to an economy's current and future standard of living. (2) Consumer Goods are goods produced for present consumption and don't significantly add to future production ( food items basic to survival, fast food, consumer electronics, clothes, appliances and other "consume now" goods.

 Assume our economy is producing at Point "A" on our graph.  Because we are ON the PPF it means we are utilizing all of our productive resouces in the least costly way.  We are said to be "PRODUCTIVELY EFFICIENT" at this point, fully employing all our productive resources at the lowest cost in terms of societial resouces.   Now, do we HAVE to produce at Point "A"? NO! We COULD produce ANYWHERE on the PPF, but this economy finds itself producing "X* Capital Goods and  "Y* Consumer Goods" .  This seems to be this economy's preferred  bundle of Capital and Consumer Goods.  WHERE a society decides to produce on the PPF is called an "ALLOCATIVE EFFICIENCY"  decision.  So, this economy is productively efficient at point "A" and it has reached and allocative efficiency at point "A" as well...

I believe Friedman is suggesting (in this article and MANY others) that what we should do is shift resources towards "activities" that promote furture economic opportunities, ergo economic growth.  This would entail "giving up" some current consumption and investing in education, entrepreneurship, and "capital" so we can create the jobs of the future. This would nessecitate a movement along our PPF to a new point, Point "B".  (See Graph below) Remember, we MUST give up something in order to have more of something else (OPPORTUNITY COST!)

At Point "B" we are producing MORE Capital Goods relative to Consumer Goods compared to our previous Point "A".  We have ADDED to our CAPITAL STOCK and subtracted from our Consumer Good production. 

With this INCREASE in Capital Stock the economy now has the ability to produce MORE Goods (we have better education, more innovation, more entrepreneuship) that will lead to MORE productivity gains.  Our PPF will INCREASE, or shift to the right reresenting the economy's ability to produce MORE CAPITAL AND CONSUMER GOODS. See Graph below...

At Point "C" the economy can now produce Y2 number of consumer goods AND... (see graph below).

...we can now produce "X2" number of Capital Goods...Essentially, we can now produce MORE of BOTH Capital and Consumer Goods...Think about it this way---we gave up present consumption in order to invest in the future. With the subsequent increase in Capital Stock we can now produce more goods. The economy is going  need MORE workers to produce those goods.  Workers will have more income (and the nation as a whole will also) and they will want to buy MORE consumer goods and that will stimulate production of consumer goods (which the economy can NOW accommodate )...As a result, the WHOLE PPF will shift to the RIGHT representing an INCREASE in Productive Capacity. The economy can produce any bundle of Captial and Consumer Goods that is GREATER than it could at the  previous PPF. More "stuff" means a higher  standard of living!! ..This is what ECONOMIC GROWTH REALLY is!! (for better or worse)...

Obama should bring together the country’s leading innovators and ask them: “What legislation, what tax incentives, do we need right now to replicate you all a million times over” — and make that his No. 1 priority. Inspiring, reviving and empowering Start-up America is his moon shot....You want more good jobs, spawn more Steve Jobs. Obama should have focused on that from Day 1. He must focus on that for Year 2.

Can you see the PPF shift before your eyes???

Questions to ask

1. Is Friedman right about what we should do to promote economic growth?

2. Are there other things we can do to promote economic growth?

3. Are the policies that Congress is pursuing now (Healthcare, Banking reform, Cap and Trade, etc) going to hurt or enhance future economic growth? Find the postitve and negatives!!!